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EXERCISE 4: Suppose that Peak's management has some doubts that the manager of the backpack division actually earn a 30 % ROI on the new
EXERCISE 4: Suppose that Peak's management has some doubts that the manager of the backpack division actually earn a 30 % ROI on the new line of backpacks and also that the invested assets needed to produce can backpacks would actually be $350,000. Go back to the original assumptions but revise the expected the new ROI from 30% to 27% and the invested assets from $300,000 to $350,000. Would these new estimates change the company's decision about producing the new line? Calculate the new overall ROI for the backpack division if the $350,0o0 is invested: Previous Op. X Increase in Op. New Assets Expected New Op. Income + Invested ROI Income Income % Now, calculate the new operating assets if the $350,000 is invested: New Assets Invested Previous New Op. + Assets Assets Calculate the new overall ROI: Operating Income Operating Assets ROI= Next, calculate the Residual Income: Operating Assets X Desired ROI New Operating Income Residual Income $ S % = $ X Should the backpack division adopt the new line of backpacks, Yes or No?' 40
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